The Corporate Insolvency and Governance Bill (“Bill”) published on 20 May 2020 proposes to introduce a number of significant reforms to UK restructuring and insolvency law . The scope of the Bill is wide ranging and includes measures to protect companies in financial difficulty as a result of the current pandemic. Several of the provisions contained in the Bill will have particular impact on the landlord and tenant relationship during the current COVID-19 crisis, which is the focus of this article.

Temporary prohibition against petitions on the basis of statutory demands

An unsatisfied statutory demand can be used by a landlord as evidence that a company cannot pay its debts and is a ground on which to present a winding up petition. The Bill contains a temporary prohibition on presenting winding up petitions from 27 April 2020 based on statutory demands served between 1 March 2020 to 30 June 2020 (or one month after the legislation is enacted, which will be relevant in this instance). This prohibition was introduced due to the perceived incorrect use during the COVID-19 pandemic of statutory demands by certain landlords to “encourage” tenants to pay their rent as their other usual recovery methods (such as forfeiture of the lease) had been curtailed.

Further, the Bill proposes a restriction on winding up petitions in general presented between 27 April 2020 and 30 June 2020 (or one month after the legislation is enacted) unless the petitioner has reasonable grounds for believing that:

  • coronavirus has not had a financial effect on the company; or
  • the relevant ground for petition would apply even if coronavirus had not had a financial effect on the company.

In practice it will be very difficult for a creditor to demonstrate that “coronavirus has not had a financial effect on the company” and the onus is on the landlord to demonstrate that it has reasonable grounds to believe this or the relevant ground for petition would apply even if coronavirus had not had a financial effect on the company. The court then has to be satisfied on the evidence presented.  This seems to place an unfair burden of proof on the landlord who will not necessarily have access to the financial data of the tenant to evidence their claim.

If enacted in its current form, this provision in the Bill will have retrospective effect from 27 April 2020.

Any winding up order made between 27 April 2020 and the Bill coming into force that does not satisfy the requirement above will be regarded as void, and the company will be restored to the position it was in immediately prior to the presentation of the petition.

The Bill was considered in a judgement from Mr Justice Morgan last week in Re: A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch). An unnamed high street retailer applied to the court for an injunction against the presentation of a winding up petition. The tenant had failed to pay its rent and the landlord had issued a statutory demand and e-filed a winding up petition, for which it had not yet paid the relevant court fees. Although the winding up petition had not been presented, it could be presented at any time in the future after the expiry of the statutory demand.

The court relied on financial evidence from the tenant to determine that the winding up petition would be likely to fail and that the petition would have a seriously damaging effect on the tenant. The court stated that the Bill would be enacted in “more or less” its current form and that the policy behind the Bill was clear. It granted the tenant an interim injunction on this basis, which should further deter landlords from using statutory demands or winding up petitions against tenants who have failed to pay their rent.

Company Moratorium

Another measure introduced by the Bill is a new free standing moratorium of an initial 20 business days (extendable in certain circumstances) for struggling businesses which are capable of being rescued as a going concern. The moratorium will allow directors to remain in control of the business while being overseen by an independent monitor.

Subject to satisfying the eligibility criteria, the moratorium provides a payment holiday for certain types of pre-moratorium debts as well as those incurred during the moratorium. Importantly for landlords rent due in respect of the moratorium period does not benefit from a payment holiday and the company will have to be able to pay the rent during the moratorium period. As directors have to confirm that the company’s debts (that are not subject to the payment holiday) have been paid before they can apply to extend the moratorium, and the monitor has to bring the moratorium to an end if it thinks the company is unable to pay its debts, this should provide comfort to a landlord in respect of payment of rent. To the extent that the moratorium fails and the relevant debts, including rent, are not paid as they should be, they have priority status in any administration or liquidation (commenced within the relevant time period).

However, similarly to in administration, the moratorium does prohibit the following actions without consent of the court:

  • commencing insolvency proceedings
  • enforcing security
  • action under the commercial rent arrears recovery regime
  • forfeiture

and therefore limit a landlord’s options for recovering historic unpaid rent arrears.

Comment

The measures introduced by the Bill, which we expect to become law shortly, further restrict landlords’ ability to recover rental arrears from tenants. In addition to the temporary prohibition on forfeiture, introduced by section 82 of the Coronavirus Act 2020, we are now seeing restrictions on landlords pursuing tenants using statutory demands or winding up petitions. However, the current restrictions on landlords, which offer tenants protection against forfeiture and winding up petitions, do not release tenants from their rental liability under their leases which will continue to accrue. We therefore expect to see continued negotiation and agreements between landlords and tenants in respect of rental obligations under leases and further rent deferrals and rent concessions.

 ***

 If you wish to receive periodic updates on this or other topics related to the pandemic, you can be added to our COVID-19 “Special Interest” mailing list by subscribing here. For any other legal questions related to this pandemic, please contact the Firm’s COVID-19 Core Response Team at [email protected].

The post The Corporate Insolvency and Governance Bill – Impact on Commercial Property appeared first on COVID-19 Response Blog.